Small businesses winning one in three loan appeals

More than one in three small businesses using an appeals process set up
following the Project Merlin agreement have successfully challenged a bank’s
decision to reject a loan application, according to Russel Griggs, who leads
the appeals system’s team of independent reviewers.

Prof Griggs said a lack of demand from small businesses for bank debt is a significant issue. "All of the banks are trying very hard to lend. The demand out there is not good."

Prof Griggs said 37pc of the 1,100 appeals that have been made since the scheme was launched in April have resulted in a bank reversing its decision to reject an application for credit.

Following the Project Merlin deal struck between the Government and high street banks, lenders allow companies with fewer than 10 employees and sales of less than £25m to request a “monitored” second opinion if they believe that they have been unfairly declined lending by a bank.

Prof Griggs, the former head of the CBI’s small business council, told Business Club that decisions are most frequently being successfully challenged by the smallest businesses, but “overturns” also stand at around 20pc among larger companies.

“It is a high overturn rate but I’m not going to criticise the banks. They are learning and some are changing the way they do things.” He said relationship managers are often being more risk-averse than their bosses, with a more senior colleague overturning the rejection of an application.

But he expects the overturn rate to go down next year as banks are “sorting out some of the issues they’ve had”. “Between 2000 and 2008, relationship managers became very sales-oriented. That changed overnight – [suddenly] people who were used to pushing money out of the door were being asked to make judgments,” he said.

Prof Griggs, who will produce an independent report next year on the appeals process, said there were differences in performance between banks, but little regional variation. He added that he would like to see more appeals. “Small firms are often afraid that their relationship manager will get into trouble. That couldn’t be further from the truth. Everyone wins [from an appeal].”

With the Chancellor, George Osborne, due to announce more details about his ‘credit easing’ plans to improve access to finance for small businesses on Tuesday, Prof Griggs said a lack of demand for lending is a significant issue. “All of the banks are trying very hard to lend. The demand out there is not good, and that’s not just because the banks are saying no.”

However, Prof Griggs said relationship managers can find the “volume” end of the market – loans to start-ups and very small companies – difficult to appraise. “Some of them are managing 1,000 customers, so the amount of time you can spend on each individual is limited.”

He added that “an adult discussion” is needed on the way credit is judged for applications from the smallest businesses. “One of the issues we have at the volume end is with credit scoring. You can go in with the best business plan in the world but if you have a bad credit record you won’t get any money – it’s you being judged, not the business. You have to always put yourself in the place of the banker – if the applicant hasn’t got a good credit score, what would you do?

“But we need to have an adult discussion to see if the ways we judge credit are still right. If you look [for credit] in a lot of places, it looks like you’re getting turned down, which isn’t necessarily the case, but it affects your score. I think we need a discussion [on] whether we need to ask if the ways we judge people in this new economy [should be] the same as we judged them previously.”

The appeals process was established as part of the Business Finance Taskforce, an organisation set up by the British Bankers' Association to look at ways to help smaller and medium-sized businesses.

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